Rio Tinto facing US probe over Mozambique coal writedowns

Rio Tinto was already under investigation by the powerful US Securities and Exchange Commission when it self-reported three weeks ago to regulatory authorities in the US, UK and Australia over payments made in relation to an iron ore project in Guinea.

The Australian Financial Review has confirmed that the SEC has been running a high-level and confidential inquiry into the costly aftermath of Rio Tinto’s $US4.16 billion acquisition of Riversdale, a Brisbane-based operator of coal projects in Mozambique.

While Rio Tinto says it is unable to comment on a US probe that pre-dates the so-called Guineagate scandal over Rio’s Simandou iron ore project, sources in Britain say the SEC has focused particularly on the pathway the global miner took to accounting for the impairments triggered by a takeover that eventually cost then chief executive Tom Albanese his job.

Rio Tinto acquired Riversdale in a two-step takeover through April and August of 2011. Just 17 months later, with the coking coal resource falling short of expectations and the Mozambique government ruling out Rio Tinto’s preferred options for driving the coal to market, the miner took a $US3.269 billion impairment on the investment.

As an immediate result, Mr Albanese and Rio Tinto’s then energy chief executive, Australian Doug Ritchie, left the miner.

That the SEC probe has remained confidential suggests the regulator instigated the investigation, and that the company did not invite the regulatory scrutiny as it has with its concerns over the transaction in Guinea.

The SEC, like Britain’s Serious Fraud Office, has sweeping extraterritorial powers to investigate and punish companies that operate within its national boundaries.

Rio Tinto’s chief executive, Jean-Sebastien Jacques

One of the most recent Australian expressions of those powers was the investigation BHP Billiton invited on itself in 2009 after identifying possible breaches of standards around gifts and payments offered in several of its frontier jurisdictions.

That investigation came to nothing, but along the way the SEC investigators turned their focus on BHP’s management of the hospitality program that was associated with it sponsorship of the Beijing Olympics. BHP eventually paid $US25 million in civil penalties to settle the matter.

On November 9, Rio revealed that it had self-reported internal concerns over a $US10.5 million to a French consultant that had worked with the company on iron ore concessions in Guinea to the SEC, the UK Serious Fraud Office and the Australian Securities and Investment Commission.

In the same announcement, Rio confirmed that an internal audit led by US law firm Kirkland & Ellis had been made of a payment to Francois de Combret, who had advised the company in its recovery of half of its Simandou iron ore leases in Guinea.

Rio Tinto’s executive and board launched the review after leaked high-level internal emails were published on an internet forum called fnPaste. After an interim report from the audit led by Kirkland & Ellis, Rio Tinto informed the regulators of its concerns and announced that one senior executive would leave the company while another had been suspended pending the results of further review.

Both of those executives, minerals and energy boss Alan Davies and the head of legal and regulatory affairs, Debra Valentine, were summarily sacked just seven days later.

Mr Davies has since complained he was denied natural justice in that he has not been told of the nature of Rio Tinto concerns and he was not offered an opportunity to contest or explain the reasons for his dismissal. Mr Davies indicated he would pursue legal options to defend his reputation.

Because Rio Tinto self-reported to the authorities, it has been able to make public the risk of lengthy inquiries in the US, UK and Australia. As a result it has been unable to detail publicly the information gathered by its internal investigation.

Twice last week Rio Tinto’s chief executive, Jean-Sebastien Jacques, reported that the “events of Simandou have been very challenging” for the company. “I take integrity and our code of conduct very, very seriously, for me it is actually non-negotiable, we must do the right thing wherever we operate,” he said.

What concerns the SEC has about the way Rio Tinto accounted for its $4.16 billion coal folly in Mozambique remains unclear.

The original career-ending $US3.269 billion impairments and losses booked against the 2012 accounts were an adjustment of three steps. There was a $US541 million impairment to goodwill banked on completion of the transaction in 2011, $US1.581 billion of impairments to exploration and evaluation assets that were held on the intangibles account, and $US1.147 billion worth of impairments to the equity account.

The 2013 accounts were scarred by a further $US497 million impairment forced by a terminal review of the three projects that were supposed to form Rio Tinto’s new south-east African coal frontier.

In September 2014, Rio Tinto sold the renamed Rio Tinto Mozambique to India’s International Coal Ventures. The price was just $US50 million.